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BP Bond Offering Hits a Snag

Wednesday, 23 Jun 2010 | 4:57 PM ET
BP sign
BP sign

BP’s expected bond offering has hit some snags, but the embattled oil company still hopes to sell $5 billion or more of corporate debt as early as next week, according to people familiar with the matter.

After a meeting with underwriters in London late last week, BP instructed lawyers to start preparing the offering documents for a planned sale of corporate bonds with five and ten year maturities by the Tuesday or Wednesday of this week, people familiar with the matter said at the time.

But it soon became clear that the “risk factors” section of the documents, in which BP would lay out the perceived risks to its bondholders, was too delicate an explanation to rush, says one of the people familiar with the matter, and the company realized it would likely need at least another week to finish the prospectus.

A spokesman for BP declined to comment.

Another hurdle the company now faces is that sentiment in the bond community appears to be mixed. While some potential bond buyers are intrigued by the possibility of owning BP debt at the proposed 8 percent to 10 percent yield—a significant return compared to benchmark U.S. Treasurys—others were balking at the growing liabilities associated with the company’s April 20 Gulf spill, according to people who are involved in discussions about the deal.

BP underwriters initially planned to market unsecured bonds to plain-vanilla investors, like Pimco, Fidelity, and Blackrock, said people familiar with the discussions last week. Indeed, on June 17, Pimco co-chief investment officer Bill Gross disclosed on CNBC that he’d recently purchased $100 million of BP debt, adding that he saw “significant value” in the company’s one-year bonds.

But in recent days, some of the bigger bond funds have shied from the notion of buying BP debt, according to market participants, saying that even a 10 percent yield may not be worth the potential risks. BP bonds would be more attractive, one investor said, if they were secured by company assets.

Indeed, BP may now be more attractive to distressed and high-yield bond buyers than to traditional corporate bond buyers, say some money managers. “To the extent that you get new investors, it’s going to be a group of folks that’s far more risk tolerant,” says Jason Brady, a portfolio manager at Thornburg Investment Management in Santa Fe, N.M. “Your only upside is the yield,” he adds, “and your downside is zero.”

Brady says he hasn’t been approached by BP bond underwriters, and that BP bonds probably won’t appeal to him.

Another capital-raising opportunity for BP may be a loan it receives from its underwriters, a group that includes Goldman Sachs, Morgan Stanley, Credit Suisse , and UBS .

The oil company continues its talks with bankers about the possibility of securing a roughly $5 billion credit line, say people familiar with the matter. That loan wouldn’t cancel out a bond offering, which could be undertaken in addition, these people say.

Kate Kelly's Related BP Links:

Programming note: "The Strategy Session," hosted by David Faber and Gary Kaminsky, airs weekdays at Noon ET on CNBC.

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